RPC Inc.: Robust Activity in Bakken, Eagle Ford Offers Earnings Upside

Apr.18.11 | About: RPC Inc. (RES)
The natural gas drilling boom is shifting to a crude oil drilling boom and companies that provide well services, like RPC Inc. (NYSE:RES), are positioned to see another year of revenue and sales growth.
In 2010, natural gas companies ramped up rig activity in order to bring acreage to held by production. As we move beyond this stage of investment, activity is going to be more wellhead cost and commodity price sensitive. Picking up the natural gas slack, however, are oil companies, which are boosting shale activity to take advantage of higher crude oil prices.
One such region driving RPC’s success in 2011 will be the Eagle Ford Shale in Texas, which is seeing a recent flurry of drilling activity. As of last week, nearly 21% more active rigs were drilling in Texas, thanks in part to Eagle Ford. Another region driving oil rig activity is the Bakken shale in North Dakota, which already produces some 458k bbl/day of crude. Despite activity recently flattening, North Dakota’s active rig count is still 68% higher than this time last year. And, activity should increase again as road load restrictions end into dry weather. Overall, increased activity in non-traditional shale increases demand for hydraulic fracking crews and equipment, the sweet spot of RES’ products and services.
How strong has the demand been for RPC’s fracking crews? Pressure pumping activity in places like Haynesville and Marcellus drove RPC Q4 revenue up 115.3% to $328.14 million. The company cited both higher volume and pricing for its ability to expand margins. RPC’s cost of revenue fell to 53.2% from 67.1% a year ago. And, SG&A as a percentage of revenue fell to 9.6% from 15.6% thanks to leveraging fixed costs.
Overall, 2010 revenue rose 86.5% thanks to the average Q4 2010 domestic rig count running 52% above the average level of Q4 2009 and 4.3% higher than the average rig count in Q3. The majority of this growth has occurred in active horizontal rigs, used in shale drilling, which are 33% higher than last year. The rapid growth in horizontal activity is providing RES with the cash flow to invest in both capacity and shareholder friendly dividends and buybacks.
The company spent $81.4 million on equipment last quarter. Much of that equipment was received prior to quarter end, suggesting upside sales for Q1. Additionally, RES boosted its dividend by 16.7% and bought back 810,377 shares last quarter.
While pressure pumping accounts for 48% of RES revenue, the company also provides support services, including rental, inspection, training and storage services for operators. This business, like pressure pumping, grew more than 100% last quarter. The company is the No. 3 market share competitor in coiled tubing with a 9% share, which accounts for 11% of revenue, suggesting further market share opportunity. Another 8% of revenue comes from rental tools where it holds a 2% share, again offering upside. The company also offers blowout and firefighting services, including pre and post event training – important given rising regulatory scrutiny.
Currently, rig activity continues to support higher revenue and profits for RPC, particularly given the fixed nature of many of its costs. In the most recent week, the BHI domestic rig count is 19% higher year over year. And, the number of land rigs drilling for oil is neck and neck with the number of rigs drilling for natural gas for the first time since 1995, reflecting ongoing land demand for rig crews, equipment and services.
The company is still small enough to be considered a takeover candidate too with a market cap of $3.5 billion. It trades at 13x 2012 earnings expectations, has beat the Street estimate in each of the past three quarters and has seen 2012 estimates rise from $1.37 90 days ago to $1.83.
As long as domestic land rig counts remain high, RES will benefit from strong cash flow. Investments in capacity, through increased hiring and equipment, and market share opportunities will drive revenue and earnings growth this year, helping support dividend increases and buybacks. Given the stock has been a strong performer in Q2, rising in each of the past five years by an average 13.94%; this is a good time to be a buyer.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RES, HAL, OIH, BRNC, HP over the next 72 hours.